M&A

Foreign power

State Grid mops up more South American assets

Sebastian-Pinera-w

Pinera: welcomes Chinese firms

For the past two centuries, US foreign policy in Latin America has been guided by the Monroe Doctrine of 1823, when the then president – James Monroe – warned European powers against trying to assert any control over the newly independent countries in the resource-rich region.

In 2019, the US inflamed tensions once more by publicly invoking it again. “Today we proclaim for all to hear: the Monroe Doctrine is alive and well,” said then national security advisor John Bolton as he warned Russia and China off interfering in Venezuela, Cuba and Nicaragua, or the “troika of tyranny” as he called them.

Oliver Stuenkel, associate professor of international relations at the Getulio Vargas Foundation in Brazil believes that all that the fresh mention of the doctrine achieved was to drive some Latin American countries further into the arms of China to seek a counterbalancing force to the US. Writing in Foreign Affairs magazine, Stuenkel argues that the incoming Biden administration now has an opportunity to reset relations by emphasising that it is more committed to the region’s growth than strategic rivalries.

The US has also been very public about its desire to prevent Latin American countries from adopting Huawei as their 5G supplier. But so far, it has been quieter about the activities of State Grid International, the overseas arm of the Chinese government-owned electricity giant.

State Grid continues to mop up South American assets, paying hefty premiums to expand its international portfolio. Its most recent acquisition was the purchase this month of a 96% stake in Chile’s largest power distribution company, General de Electricidad (CGE)

The €2.6 billion ($3.1 billion) acquisition was valued at an eye watering 15 times Ebitda. This is twice what most financial analysts believed the company was worth.

The purchase follows on from last year’s $2.23 billion acquisition of Chile’s third largest electricity distributor, Chilquinta. Together, the two companies will give State Grid a 57% market share, according to Chile’s domestic press.

Both sellers were foreign companies. CGE was owned by Spain’s Naturgy, which wanted to raise funds to pay down debt. Chilquinta was owned by California’s Sempra Energy, which is divesting its Latin American assets so that it can refocus on the US.

What makes State Grid a very different proposition is the fact that it is an arm of the Chinese state. Chile’s electricity distribution is now largely under the control of another country’s government.

Was this the scenario that Chilean President Sebastian Pinera really had in mind when he said that he wanted to “transform Chile into a business centre for Chinese companies so they can reach out across Latin America?”

This year marks the 50th anniversary of diplomatic relations between China and Chile. The latter was the first nation from Latin America to recognise the People’s Republic of China and it has been particularly welcoming of foreign investment in recent years. Pinera has also described the Sino-US trade war as “absurd”.

State Grid’s buying spree has expanded its international portfolio to a tenth of its overall assets and one third of its profits.

Where might it go next as it dips into its deep financial pockets? In addition to Chile, State Grid has a strong portfolio in Brazil. In 2017, it finalised a $10.3 billion acquisition of electricity distributor CPFL, which has a 13% market share. It also owns 14 transmission companies and a hydropower project.

State Grid may do more deals with Naturgy. The Spanish firm has a large portfolio of assets including Brazil’s third largest piped gas distributor, Mexico’s second largest independent power producer and one of its largest gas distributors.

Bidding against State Grid for such assets could be China Yangtze Power. The hydroelectric firm listed this year in London partly as a means to finance overseas acquisitions (see WiC516). In 2019 it spent $3.5 billion on another of New York-listed Sempra’s assets – Peru’s largest power distribution company, Luz del Sur.


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